Countering The Luntz Memo: Financial Reform Edition

February 09, 2010 1:53 pm ET

In January, Republican wordsmith Frank Luntz published a memo outlining special phrases and talking points conservatives should use to defeat efforts at reforming America's financial system. Like his May 2009 memo on health care reform, Luntz's newest effort is riddled with falsehoods.

Republicans Dropped the Ball
On Reforming The Housing Market

Frank Luntz :

Americans are divided on the
cause of the crisis. The consequences of the crisis may be undeniable, but
its cause is debatable.

To conservatives: government
policies caused the bubble and its ultimate crash. Fannie Mae, Freddie Mac, the
Federal Reserve, and the Community Reinvestment Act all had a role in the
catastrophe. [Language of Financial Reform, January
2010; emphasis original]

Then why didn't Republicans tackle the problem when they were in
charge?

In 12 Years,
Republicans Never Reformed Fannie Mae Or Freddie Mac. According the House Financial Services
Committee, "Before this Congress, the last law enacted to reform the regulation
of Fannie Mae and Freddie Mac was in 1992 - when the Democrats controlled the
House and Senate. In 12 years of Republican control, Congress enacted no
legislation addressing the GSE's safety and soundness and there was active
resistance from the Bush Administration on the bills the House did consider.
When Former House Financial Services Chairman Mike Oxley attempted to pass
responsible legislation through the House, he met with White House opposition
and indifference from the Republican Senate." [House Financial Services Committee, accessed 4/15/09;
emphasis original]

In 12 Years,
Republicans Never Passed A Law To Provide Consumer Protection In
Mortgages. According the House
Financial Services Committee, "The last law enacted to provide consumer
protection in mortgages was in 1994 - when the Democrats controlled the House
and Senate. That law, the Home Ownership and Equity Protection Act (HOEPA),
included a host of consumer protections against high-cost and other exotic
mortgage products and specifically required that the Federal Reserve write
rules that would stop abusive lending practices." [House Financial Services Committee, accessed 4/15/09]

Home
Ownership And Equity Protection Act Required "New
Disclosures And Clamp New Restrictions On Lenders Of High-Cost Consumer Loans." According to the Boston Globe, "When regulations are
written and put into effect next October, the law will require new disclosures
and clamp new restrictions on lenders of high-cost consumer loans secured by residential mortgages... The federal law is aimed
at independent mortgage brokers and lenders who practice 'reverse redlining,'
which occurs when lenders target poor and minority communities to make loans
with unfair terms. The federal law is triggered when lenders make high-cost consumer loans in which the equity in a person's house is used as
collateral." [Boston
Globe, 10/16/94]

Luntz's Talking Points Are Based On A Fundamentally
False Premise

Luntz Memo:

Now, more than ever, the
American people question the government's ability to effectively address the
issue. Billions in handouts to Wall Street. A stimulus bill that isn't
creating jobs. Cash for Clunkers. Health Care. A "Credit Card Bill of Rights"
that increases fees and interest rates on consumers. The American people
believe Washington has gone wrong, and these
legislative initiatives have become symbols of Washington's inability to do anything right.
[Language of Financial Reform, January
2010; emphasis original]

Luntz's assumptions
are dead wrong.

"Billions in Handouts to Wall Street"

In The
Midst Of A Downward Spiral, TARP Helped Stabilize The Financial System. As reported by Reuters, "The U.S. government's $700
billion financial rescue program has helped to stabilize the system, but may be
creating systemic problems by fueling a belief banks will always be bailed out,
a watchdog for the program said on Wednesday. 'Compared to where we were
last October there is no question that the system if far more stable. We were
on the precipice and I think the (Troubled Asset Relief Program) contributed
with the other programs to pull us back,' Neil Barofsky, the special inspector
general for the program, told CNBC. 'But I do think because of the moral
hazard, because of some systemic risks that are associated with making these
institutions bigger and bigger ... systemically we may be in a more dangerous
place even then we were a year ago,' he said." [Reuters, 10/21/09]

"A Stimulus bill that isn't creating jobs"

CBO:
The American Recovery And Reinvestment Act Has Raised GDP Up To 3.2%,
Created Up To 1.6 Million American Jobs. According to the nonpartisan
Congressional Budget Office, "CBO now estimates that in the third
quarter of calendar year 2009, ARRA's policies raised real GDP by between
1.2 percent and 3.2 percent, lowered the unemployment rate by between 0.3
and 0.9 percentage points, and increased the number of people employed
by between 600,000 and 1.6 million compared with what those values
would have been otherwise." [CBO, 11/30/09;
emphasis added]

McCain Adviser: "The Stimulus Was
Very, Very Important In The 4th Quarter" Growth. During an
appearance on Bloomberg television, former adviser to Sen. John
McCain, Mark Zandi said, "I think stimulus was key to the 4th
quarter. It was really critical to business fixed investment because there
was a tax bonus depreciation in the stimulus that expired in December and
juiced up fixed investment. And also, it was very critical to housing and
residential investment because of the housing tax credit. And the decline
in government spending would have been measurably greater without the
money from the stimulus. So the stimulus was very, very important in the
4th quarter." [Bloomberg via Think Progress, 1/29/10;
emphasis added]

"Cash For Clunkers"
Was A Huge Success.

According to Time
Magazine:

Was the cash-for-clunkers
program a success? The short answer is yes. The program accomplished what it was set out to
do, which was to get consumers back into the showrooms and to jump-start
new-vehicle sales.

With some creative marketing and
wheeling and dealing, dealers were also evidently able to convert many
nonqualifying shoppers into the buyers of other new or used cars, a trend that
created a sizable positive impact on sales as an indirect consequence of the
program.

On the other hand, the clunker
program was overly complicated, a nightmare to manage for dealers and difficult
to understand for consumers. I would give the pure sales impact of the program
an A and the administration of the program a D.

In the end, how many cars were
sold through the program?
The official total sales that were directly because of the program will be
right around 700,000 units. The average incentive - based on the most recent
data available - was around $4,200. If we simply divide $3 billion by $4,200,
we get about 714,000 units. The original forecast for 250,000 units was based
on the initial $1 billion budget for the program. [Time Magazine, 8/6/09]

According to the Boston
Globe, "Congress passed the Credit Cardholders' Bill of Rights Act of 2009
and sent it to President Obama for his signature. This bill amends the Truth in
Lending Act and provides consumers with many reforms to the way credit cards
are issued and administered today. According to the bill that was passed, here
is a summary from the Library of Congress of what it means to consumers:

Creditors
cannot increase the annual percentage rate (APR) during the first 12
months of opening up an account.

Creditors
are required to provide consumers with a 45-day advance notice of changes
in rates and significant contract changes. Rates that change due to a
change in the index that the rate is based on are excluded from this
45-day notice requirement.

Promotional
rates need to be in effect for at least six months from the beginning date
of that promotion.

That's What We're Trying To
Do

Frank Luntz Urges
Conservatives To Ask: "What Government Policies Were Changed? What Laws Were
Repealed?"

Despite creating economic
conditions comparative to the Great Depression, it is important to ask some
basic questions -- What government
regulator lost their job for their hand in the crisis? What government policies
were changed? What laws were repealed? The obvious answer is none.
[Language of Financial Reform, January
2010; emphasis original]

This section is as counterintuitive as one can get. By asking "what government policies
were changed? What laws were repealed?" Luntz is arguing
that financial regulatory reform shouldn't
happen because it hasn't happened.

What government
policies were changed? What laws were repealed? None. That's exactly why President
Obama and Democrats in congress are seeking to enact financial regulatory
reform that restores stability into the system.
Americans' retirement accounts shouldn't be gambled away by greedy Wall
Street bankers seeking to make a quick buck.

The Real Cause Of Crisis

Luntz Memo:

Yet, Congress is poised to add another Washington
agency with more Washington
bureaucrats on top of existing laws and regulations. In fact, the proponents of
the new government agency and regulations are the same members of Congress who
created and supported the housing bubble. [Language of Financial Reform, January
2010]

In
this section, Luntz repeats the conservative myth that progressive legislation
preventing discrimination and predatory lending caused the financial
crisis. In reality, there is a large
consensus that deregulation, poor enforcement, and a lack of transparency were
the underlying causes of the crisis. In
1999, the Republican Congress passed the Gramm-Leach-Bliley Act, which repealed
Depression-era banking regulations and is widely viewed as the precursor for
the collapse of the financial system.

Gramm-Leach-Bliley Act Integrated
Commercial & Investment Banks, Making The System Less Sound. As
reported by Newsweek:

Glass-Steagall
was one of the many necessary measures taken by Franklin Delano Roosevelt and
the Democratic Congress to deal with the Great Depression. Crudely speaking, in
the 1920s commercial banks (the types that took deposits, made construction
loans, etc.) recklessly plunged into the bull market, making margin loans,
underwriting new issues and investment pools, and trading stocks. When the
bubble popped in 1929, exposure to Wall Street helped drag down the commercial
banks. In the absence of deposit insurance and other backstops, the results
were devastating. Wall Street's failure helped destroy Main Street.

The
policy response was to erect a wall between investment banking and commercial
banking. It outlasted the Berlin Wall by a few decades. In the 1990s, as
another bull market took hold, momentum built to overturn Glass-Steagall.
Commercial banks were eager to get into high-margin businesses like
underwriting hot tech stocks. Brokerage firms saw commercial banks, with their
massive customer bases, as great distribution channels for stocks, mutual
funds, and other financial products that they created. Generally speaking, the
investment banks were the aggressors. In April 1998, Sandy Weill's Travelers,
which owned Salomon Smith Barney, merged with Citicorp. The following year,
Congress passed and President Clinton signed the Financial Services
Modernization Act of 1999, known as the Gramm-Leach-Bliley Act. This law
effectively deleted the prohibition on commercial banks owning investment banks
and vice versa. [Newsweek, 9/15/08]

Gramm-Leach-Bliley
Act is Commonly Blamed For The Current Financial Crisis. According to the Washington Post, "[Phil] Gramm's
aggressive efforts when he was chairman of the Senate Banking Committee to
deregulate the banking and financial services industry. That culminated in passage in 1999 of a
sweeping financial services law that tore down the Depression-era
Glass-Steagall wall separating regulated commercial banks from largely
unregulated investment banks. And little
regulation was put in place to replace it... To many liberal economists, Gramm's
efforts set the stage for the current crisis.
Lending by noncommercial banks has soared, to about 70 percent of total
lending. Investment banks, including
Bear Stearns, grew too large to be allowed to fail." [Washington Post, 4/2/08]

"Lax Regulation, Supervisory Neglect, Lack Of Transparency, And
Conflicts Of Interest All Undermined The Foundations Of Our Financial System." In a November 2008 hearing in the House
Committee on Oversight and Government Reform, Center for American Progress
Fellow Michael Barr testified on the cause of the financial collapse. Barr said, "We must act aggressively to
contain the crisis, reform our home mortgage system, and develop new approaches
to broad-scale housing and financial-sector reform-beginning with a clear
understanding of the problem itself. Lax
regulation, supervisory neglect, lack of transparency, and conflicts of
interest all undermined the foundations of our financial system. Financial
innovations in securitization and other factors brought increased liquidity,
but also broadened the wedge between the incentives facing brokers, lenders,
borrowers, rating agencies, securitizers, loan servicers, and investors.
The lack of transparency and oversight, coupled with rising home prices, hid
the problems for some time. When home prices and other assets imploded, credit
woes cascaded through the financial system, and the lack of trust in the system
meant that even sound financial institutions faced contagion from the crisis.
That is why we need fundamental change in our system of financial regulation."
[Center for American Progress, 11/14/08;
emphasis added]

"It Was A Disdain For
Regulation By Those Tasked With Enforcing The Rules... That Caused The Financial
Crisis." Center for American Progress Vice President for Economic Policy
Michael Ettlinger wrote: "The descent into the Great Recession established
without a doubt the necessity of establishing a set of rules and regulations to
guide our nation's financial structure. It was a disdain for regulation by
those tasked with enforcing the rules-and an incoherent regulatory structure
that allowed them to get away with it-that caused the financial crisis and
precipitated the Great Recession that has left more than 15 million Americans
unemployed and searching for work. We cannot move forward on a path of
sustained economic growth until we have addressed the lapses in financial
regulation. Delaying on this policy agenda is only hampering economic growth,
and President Barack Obama recognized this in his speech last night. Financial
firms need to know the new rules on leverage requirements, their consumers, and
what kinds of businesses can be combined under one roof, so that they can adapt
their business models and get back to the important role they play in the economy
of providing credit and markets." [Center for American Progress, 1/28/10]

The Case For Comprehensive Financial Regulatory Reform

"Banks And Other
Financial Institutions Are Now So Interconnected That Problems At One Can Lead
To Problems At Others." Brookings Institution Economic Studies Fellow
Douglas J. Elliot wrote, "Regulation has largely focused on ensuring that each
financial institution was sufficiently sound in its own right with less
attention paid to how the dominos could fall if a major institution fails.
Banks and other financial institutions are now so interconnected that problems
at one can lead to problems at others which are then magnified throughout the
entire system. The level of systemic risk before this crisis was much higher
than had been appreciated, spurring the government into significantly more
extreme responses than one would have expected to be necessary." [Brookings
Institution, 6/17/09]

"Investors Also Need
To Have Their Faith Restored In Some Of The Basic Tools That Markets Rely On." Center
for American Progress Vice President for Economic Policy Michael Ettlinger
wrote: "Investors also need to have their faith restored in some of the basic
tools that markets rely on. Without reform it's going to be a long time before
wise investors place much faith in credit-rating companies and professional
guidance from the financial services industry. Nor are many going to be willing
to put their trust in black box models developed by Wall Street's mathematical
geniuses." [Center for American Progress, 6/18/09]

Historically, The Government Acts To Restore Stability
In Times Of Turmoil

After Financial
Crises, The Government Has Historically Stepped In And Fixed The Broken System.
As reported by the Wall Street
Journal, "various crises have sent the pendulum swinging back and forth.
The handling of the financial panic of 1907 -- when a private individual,
banker J.P. Morgan, bailed out a floundering U.S. economy -- stirred so much
political outrage on the left that in 1913 the government created the Federal
Reserve to run the financial system. The Depression-era collapse of markets led
to the birth of a slew of new agencies, including the Securities and Exchange
Commission and the Federal Deposit Insurance Corp., which regulated and remade
American-style capitalism." [Wall Street
Journal, 7/25/08]